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Yesterday President Barack Obama denounced the tax breaks given to owners of corporate jets. Described by MSNBC Television program host Rachel Maddow as a “corporate tax loophole” that allows “giant corporations to dodge their taxes,” Obama cast the issue as corporate fats cat vs. kids: “You go talk to your constituents — the Republican constituents — and ask them, are they willing to compromise their kids’ safety so that some corporate jet owner continues to get a tax break?
(Yes, I sometimes watch the leftist television news programs — so that you don’t have to.)
Maddow, if you’ve ever watched her show, is given to snarky exaggeration as her style. The use of the term “dodge” is an example. Most people would think that “to dodge” means to avoid completely, and that’s what Maddow would like her viewers to believe: that these giant corporations are paying no taxes at all when they buy these planes.
The reality, however, is different and much less sensational. Since the tax in question is an income tax, we must first calculate income. That means accounting for the expenses incurred in running the business. For assets with a long lifespan, depreciation is used, whereby a portion of an asset’s cost is deducted each year from income. With the U.S. corporate income marginal tax rate at 35 percent, being able to deduct one dollar in depreciation saves 35 cents in taxes.
The issue in question, as identified by Lachlan Markay is an economic incentive implemented in the form of accelerated depreciation for purchasers of corporate jets. This provision allows companies to deduct depreciation costs from their income sooner, so they save on taxes now rather than later.
Accelerated depreciation doesn’t increase the total amount of depreciation that can be deducted from income. Of course, taking a deduction this year rather than in a later year is valuable.
So it’s not a “dodge,” as Maddow told her viewers. But it is a benefit to the companies that take advantage of it.
The real question is whether these manipulations of the tax code are harmful or beneficial. Certainly Congress did not believe they were harmful when it passed the legislation that created this special accelerated depreciation, available for only a short time for purchasers of specific assets. It was designed to provide a stimulus to a specific industry. And if that term “stimulus” seems familiar, the legislation that created this accelerated depreciation incentive was part of H.R. 1: American Recovery and Reinvestment Act of 2009, also known as ARRA, also known as the stimulus bill, and one of the first legislative initiatives by President Obama.
Now the president, evidently, feels this wasn’t such a good idea. Or he has decided that purportedly rich corporations are a convenient and politically expedient opponent. Attacking them fires up his base, as evidenced by Maddow’s over-playing of this matter.
This is also an example of using the tax code in order to achieve an economic or social policy goal. In this case, one industry benefits, but others don’t. The remaining taxpayers have to make up the difference in lost tax revenue. Or, the country simply goes deeper in debt, and the cost is passed on to future generations.
A further effect is that by making corporate jets cheaper (because of the accelerated depreciation), companies are induced to spend in this area when — absent the incentive — they might make alternative investments. So the question is: Are discounted corporate jets a wise investment for companies who otherwise might not buy them, at least not this year? Are Congress and the president smart enough to know that investment should be directed to this area? Todd Tiahrt, who represented Wichita at the time, thought so. That city, of course, is home to several companies that manufacture the types of airplanes targeted by Congress.
But what benefits one city or one industry is not necessarily good for the rest of the country. A better course is to simply cut tax rates and let each company decide how to direct its capital investment.